Some questions about alternatives

(9 am. – promoted by ek hornbeck)

I’m not an economist, nor do I play one on the blogs. All of this talk about Wall Street and our financial institutions is something that, up until a few months ago, I was blissfully ignorant about.  

Over the last couple of weeks, I’ve been reading like mad to try and understand, not only what’s happening, but what the potential solutions would be. I probably have enough information about Obama’s plan to be dangerous (I call it Obama’s plan because the fact of the matter is that its his administration. I have no illusions that he is supporting Geithner under duress or that someone is twisting his arm to do so). The so called PPIP has been dissected pretty thoroughly both by those who support it and those who don’t.

Where I am lacking in information is about the alternatives. As I see it, there’s no really painless or “right” way out of this mess. So the fact of the matter is that it is entirely possible that Obama’s plan is the best of the possibilities. And if that case is to be disputed, then I need to learn more about the options. As Saul Alinsky said in his “Rules for Radicals”:

The price of a successful attack is a constructive alternative.

Never let the enemy score points because you’re caught without a solution to the problem.

 

The problem is, I’m hearing a couple of alternatives proposed, but not getting enough by way of details to evaluate them. So I thought I’d put out my questions and see if my fellow bloggers can help me out.

One potential solution that isn’t getting much serious attention is that we do nothing and simply let the whole system collapse. I’ve heard at least one person suggest that we could simply use the money being spent on the bailout to take care of the basic needs of those who would loose their jobs, homes, retirement, etc. I’m not sure alot of people support this idea and its hard for me to even visualize the possibility of a total global collapse of the economy. But if someone could make a case for what this would look like and how it wouldn’t lead to a tremendous amout of chaos (which usually brings violence in its wake), I’d be interested in hearing about it.

The alternative most often given as an alternative is to put these financial institutions into receivership or nationalize them. Here I have tons of questions.

My first one is about whether or not this is even possible or legal. From what I’ve read, the FDIC has the authority to put banks into receivership. The main companies that are the biggest part of the problem (Goldman Sachs, CitiGroup, etc.) are not (just) banks – they have grown much beyond that function. It has been suggested that nationalization of companies like this would not be legal UNLESS Congress passes the new regulations proposed by the Obama administration last week. Is this, in fact, a barrier to nationalization?

The second question I have is that if it were possible to nationalize these institutions, what do we do with the fact that they don’t just operate in this country, but are global companies. Is that another barrier to nationalization.

Thirdly, when a company is nationalized or goes into receivership, what happens to the bond and equity holders in the company? Do they loose their investment? And if so, it seems like that would have a HUGE impact across the spectrum of the economy. But I’d like to learn more about that.

Fourthly, I wonder what happens to my small, but wonderfully run local bank in the process. I assume they would not be nationalized. But I also wonder how they would be affected by the process.

Finally, everyone I hear talk about nationalization seems to be referring to what the FDIC does now with banks, which is also called receivership. Basically the FDIC takes over the banks, reviews its assets and liabilities, and sells it off to another bank/financial institution. It seems to me that too often when this option is proposed, many of us assume that it means long-term public ownership. But I don’t think that’s what the economists who recommend it have in mind.

If we are, indeed, talking about receivership, a recent case is that of IndyMac (tiny in comparison to the giants we’re talking about), cost the taxpayers $10.7 billion dollars. What would receivership of Goldman Sachs or CitiGroup cost us?

That’s most of my questions unless there are other options I haven’t heard about yet. The criticisms of Obama’s plan have been laid out pretty extensively and they make sense to me. But if I’m going to advocate for an alternative, I need more information.    

52 comments

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  1. can help me out with all of this. My head starts spinning after awhile in trying to understand it all.

    • Alma on March 30, 2009 at 7:19 pm

    questions you asked.

    Makes my head spin from the beginning.

    What I would like to see is the Gramm, Leach, Blyley act (spelling was probably wrong on that)repealed.  The companies split up (may as well do the fairness doctrine at the same time and break up Murdochs empire) see which units are viable and which don’t stand a chance and take appropriate action on their viability.  

    • Edger on March 30, 2009 at 7:25 pm

    starting with first stopping doing the things that are causing the problem, then building from there.

    Noam Chomsky on the economy and democracy Pt1

    and Noam Chomsky on the economy and democracy Pt2

    The longer we wait to stop doing the things that are causing the problems, the more out of control the problems get, and we will soon be at a point where there is no solution but uncontrolled collapse, and chaos.

  2. In reality, we should have seen this all coming a long time ago.  I have absolutely limited understanding of economics, as well, but I don’t think it takes a genius to understand that you have a situation where over the past eight years plus now, the Bush Administration spent into oblivion.  Meantime, jobs over all that time were being lost with no jobs being created to replace them.  Then, the sub-prime crisis, as it was called — this, too, was enabled by the Bush Administration, when they removed the control of States over the banks (reenacting an 1863 National Bank law) and thus, removing States’ ability to re-negotiate their loans with their customers.  Crash!  The continual deregulation of the banks and Wall Street enabled the “horse to get out of the barn,” so to speak — as though GREED and the GREEDY could self-govern with conscience — GREED has no conscience!  So, adding all these ingredients together, how could we not foresee that something had to give, somehow?  And, “voila!”  [The title of all which things should be called, “American People Raped for Over 8 Years — Now Penniless!”]  

    Krugman, in an article entitled, Krugman: The Market Wizards Were Exposed as Frauds — Too Bad Obama’s Team Still Believes in Their Magic

    By Paul Krugman, The New York Times. Posted March 27, 2009.

    The Obama administration thinks a little regulatory tinkering will take Wall Street back to its glory days of fraudulent finance.  

    . . . . But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

    The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

    And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

    It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation. . . . .

  3. One potential solution that isn’t getting much serious attention is that we do nothing and simply let the whole system collapse. I’ve heard at least one person suggest that we could simply use the money being spent on the bailout to take care of the basic needs of those who would loose their jobs, homes, retirement, etc. I’m not sure alot of people support this idea and its hard for me to even visualize the possibility of a total global collapse of the economy. But if someone could make a case for what this would look like and how it wouldn’t lead to a tremendous amout of chaos (which usually brings violence in its wake), I’d be interested in hearing about it.

    And it is JUST a question, not advocacy

    Would it lead to more or less violence than is happening in Iraq, Afg. and everywhere else that the current system is operating in it’s inequitable fashion? That is a pretty high bar.

    Would it lead to more than a million deaths?

    Would it lead to more or less economic violence that is being done under our current system to families, that leads to domestic abuse and high crime rates and homelessness (economic refugees)?

    Fourthly, I wonder what happens to my small, but wonderfully run local bank in the process. I assume they would not be nationalized. But I also wonder how they would be affected by the process.

    Your small local bank is part of the solution. Huge, “to big to fail” corporate financial entities (persons under the 14th) ARE the problem, since they have the power to dictate how we live.

    Why do they have that power?

    What gives them the right to make all the people of the world suffer at their whim?

    Imo, that is the real question.

    How do we take their power to dictate and blackmail us…..with the least suffering.

    We are conditioned to believe that only ‘they’ can save us and that we would turn into a slavering chaotic mob without them to tell us what to do.

    That fear paralyzes us, makes us not trust ourselves, which makes us dependent on them. But….are you a mob? Would you act as a mob? Then what makes you think others will?

    (ps, thanks! that is the basis of an essay!)

  4. studying up for about 4 months, so I can give you my unqualified view and you can take it for what it is worth.

    Q1) No, it is not legal, yet. One of the major causes and continiuing problems with this whole thing is the repel of Glass-Steagall and the Gramm provisions that prevent the regulation at all of the direvetives markets (CDO’s and CDS’s) you can find my descrption of how we got here, here. Once we get the new regs yes they can be treated like the FDIC treats commercial banks.

    Q2)They are registered as US companies and as such all other areas of operations are subservient to our laws. So, there is no problem with them operating in other countries. It is all about having the power to regulate them or nationalize them here.

    Q3) Sort of. It depends on how bad the company is. In general there is an attempt to protect what is called the “senior fin incing” which are the bond holders. They get screwed but not as bad as when a bankruptcy. This is where it gets expensive for the Federal Government as they would have to pay some or all of these bonds for the very reason you site.

    Q4) Nothing would happen to your banks, assuming they don’t hold bonds on these guys. If they do not and have the solvency to remain open then nothing happens. When we are talking about nationalizing (with the exception of some folks that want to totally scrap the system) we are talking about just the financial institutions that are insolvent.

    Q5)It depends on how long we run it. Indy Mac is kind of unique in that we (the FDIC) ran it for quite a while before selling it. The reason they did that was that they felt (rightly) that they would lose a lot more by selling it in a distressed state. So while it is going to cost a lot (think another trillion or so) that is nothing compared to letting them go down uncontrolled.

    Hopefully this helped.

  5. Bilderberg meeting

    Any number of Janes listed US ordinance would solve most of the problems mankind faces today.  That would be ideal but alternates would be taking up residence south of the equator.

  6. econ 101 idiot. I started reading Jerome a Paris and David Sirota  as soon as I got on the net. I saw this coming in the Clinton ara as it directly affected my source of income and I’ve always been as my family calls it a Prol. Jerome is a good source for knowledge because he’s a banker. The system in France is a lot different then ours and not as neoliberal.

    Plus he doesn’t write or think in mathematical or ideological theories. I recommend reading his diaries.

    I think that this is a case of Shock Doctrine much as the Mushroom Cloud’s were for the war It is a form of extortion. It is to me the final takeover of our government by the corporations via Goldman Saks. Why feed entities that are too big to fall, making them even bigger? There are laws still on the books that were put in place to bust up these giants across the board. Anti trust laws already exist. The Sherman Act was put in place in the 1890’s when the robber Baron’s ran amok.

    http://en.wikipedia.org/wiki/S

    Purpose

    In 1879, C. T. Dodd, an attorney for the Standard Oil Company of Ohio, devised a new type of trust agreement to overcome Ohio state prohibitions against corporations owning stock in other corporations. A trust is a centuries old form of a contract whereby one party entrusts their property to a second party. The property is then used to benefit the first party. In a corporate trust, the various corporations assign their stock to a board of trustees. The trust then issues trust certificates to the stockholders. They receive the financial benefits, while the board of trustees maintain operational control. By consolidating control of most companies in an industry under one controlling board, the industry is essentially monopolized.[7]

    Around the world, what U.S. lawmakers and attorneys call “Antitrust” is more commonly known as “competition law.” The purpose of the act was to oppose the combination of entities that could potentially harm competition, such as monopolies or cartels. Its reference to trusts today is an anachronism. At the time of its passage, the trust was synonymous with monopolistic practice, because the trust was a popular way for monopolists to hold their businesses, and a way for cartel participants to create enforceable agreements.[8].

    The Sherman Act was not specifically intended to prevent the dominance of an industry by a specific company, despite misconceptions to the contrary. According to Senator George Hoar, an author of the bill, any company that “got the whole business because nobody could do it as well as he could” would not be in violation of the act. The law attempts to prevent the artificial raising of prices by restriction of trade or supply.[9] In other words, innocent monopoly, or monopoly achieved solely by merit, is perfectly legal, but acts by a monopolist to artificially preserve his status, or nefarious dealings to create a monopoly, are not.

    The government both parties have become Free Market Fundies and have no political will to restore the laws or add new ones that through out our history have kept the lassiez faire capitalist’s in check.

    I do not think this is the only way to ‘fix’ this in fact I think this way will only make it a coup d’etat. As for alternative solutions start by busting them up. Regulate them and restructure. I think were being bamboozled into thinking that all solutions lie in empowering these dinosaurs. Fear and panic only make it easier for them to pump this takeover through.

    Krugman and Summers are not wizards of some arcane mathematical unfathomable system they are both theorists of free market capitalism.  If the will was there other solutions are available. I see it we provide the will. No ‘change’ has ever come about without people demanding it.

    http://www.rollingstone.com/po

    Matt Tabbi….

    “People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations…”

    And one final thought…. from a Bill Moyers Journal interview with William Greider….

    WILLIAM GREIDER: Here’s my take on the New Deal and the history of what actually happened. And it conveniently fits my deeper prejudices about the country and how progress is achieved in America. That is, people in the streets or churches or wherever found their voice and made it happen by agitating and informing the higher authorities. In the early ’30s, Franklin Roosevelt had a set of things he thought he could do to right the ship of the Depression. He tried some of them. They didn’t work very well. Meanwhile, organized labor, others, were all over the country lighting bonfires for bigger changes. Social security came out of that. Labor rights, the first attempt to give people the right to organize their own voices in a company came out of that. A whole bunch of other reforms that we now take for granted. And Roosevelt didn’t stand athwart and try to stop them. But he let them roll him. And he- and I think that’s what, I hope for now. That people of every stripe will stand up and say, we love you Mr. President, but you don’t have it right yet. And we’re going to bang on your door until you get it right.

    http://www.pbs.org/moyers/jour

    Change is not easy. It’s scary but so is the alternative.  The Third Way, the Democratic version of neo-liberal globalism was proclaimed inevitable and the only way forward. At this point whenever the pols and their cronies the corporations tell me that either terrorists are going to kill me or insurance companies have bombs strapped to themselves an are going to fall on our world and violent mobs will get us… I just refuse to bite. Tell me something new. Nothing wrong with restructuring something that’s falling. don’t let Goldman Saks bamboozle you.    

     

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